Quality, Shelf Life, and Demand Uncertainty

Abstract

Abstract This paper studies a monopolist’s choices of quality and shelf life of a perishable good in the presence of demand uncertainty and sunk production cost. It shows that, in response to demand uncertainty, the firm typically produces multiple products which differ in quality and shelf life; under certain conditions, products with a longer shelf life are of lower quality; a probability distribution of demand which first-order (second-order) stochastically dominates another induces more (more or fewer) product varieties. It also provides conditions under which a higher quality product has a higher absolute profit margin but a lower percentage margin.